Difference Between Agreement and Contract

Difference Between Agreement and Contract

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Anshuman
Anshuman Singh
Senior Executive - Content
Updated on Feb 9, 2024 11:34 IST

The terms Agreement and Contract are mostly used interchangeably by many of us. But both of these words have a considerable difference among them. Are you aware of the difference between agreement and contract? If not, then don’t worry. You are at the right place. This article will discuss the difference between agreement and contract in great detail.

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The main difference between agreement and contract is that an agreement is not legally binding and enforceable by law, whereas a contract is legally binding and enforceable by law. Now that you know the difference between agreement and contract let’s go over the topics we will cover in this article.

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Table of Contents (TOC)

Difference Between Agreement and Contract

For a better understanding, let’s explore the difference between agreement and contract in a tabular format:

Benchmark Agreement Contract
What is it? A mutual understanding or meeting of the minds between two or more parties. A legally binding document that outlines the terms and conditions of an agreement.
Is it legally binding? No. Yes
Type Mostly informal Formal
Usage There are primarily used by friends, family, etc. They are mainly used for business activities.
Scope Has a broader scope. Has a narrower scope.
Consideration Agreements can be formed without consideration. There should be some consideration while forming a contract.
Defined under Section 2 (e) of the Indian Contract Act, 1872. Section 2 (h) of the Indian Contract Act, 1872.

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What is an Agreement?

An agreement is a type of mutual understanding or meeting of the minds between two or more parties. It’s important to note that agreements don’t have to be legally binding, meaning that the parties involved do not have to follow through with their part of the agreement.

An agreement is also known as a gentlemen’s handshake, or verbal agreement. Two of the most important features of an agreement are:

  • Two or more parties: A minimum of two parties are needed to form an agreement.
  • Consensus ad-idem: Consensus ad-idem is a word taken from the Latin language. This word implies that both parties involved should agree on the same thing and in the same way each party means.

In short, we can define an agreement as: Agreement = Offer + Acceptance

Example of Agreement

To understand what an agreement is, in a better way, let us go through an example. Here is an example that explains what an agreement is:

Two friends, Atul and Vikram, agree that they will go on a camping trip together next month. They have discussed the trip’s details, such as the location where they will travel, the date they will depart, the type of equipment each of them will bring, etc., and have verbally agreed to go. In this case, this conversation can be treated as an agreement.

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What is a Contract? 

A contract is a legally binding document that outlines the terms and conditions of an agreement. And a contract is made between two or more parties, and each party has to follow the rules stated in the contract.

A contract is legally binding and enforceable by law if any parties decide not to follow the set of rules or promises written in the contract. Two of the most essential features of a contract are:

  • Agreement: Both parties should have an agreement first before forming a contract.
  • Enforceable by law: The contract formed can be enforced by law.

In short, we can define an agreement as: Contract = Agreement + Enforceable by Law. 

Check out: Types of Contracts in Business Law

Example of Contract

In order to understand what a contract is, in a better way, let’s go through an example. Here is an example that explains what a contract is:

Suppose you rent an apartment after shifting to another city because of work. Your landlord asks you to sign a lease agreement document. The document outlines the rental terms, such as how much you will pay each month, how long the lease will last, what will happen if you violate any of the terms of the agreement, etc.

After reading the document thoroughly, you and your landlord both signed the document. Now, you and the landlord are obligated to follow the rules in the lease agreement document. This document now acts as a contract; if any party fails to fulfill the obligations, the other party can enforce the terms using the law.

You can also explore: All About Discharge of Contract

Key Differences Between Agreement and Contract

Here are the key differences between agreement and contract:

  • Contracts tend to be more detailed and complex than agreements, specifying the rights and obligations of all parties.
  • A contract is legally binding and enforceable, whereas an agreement may or may not be legally binding.
  • Contracts create legal obligations that must be fulfilled by the parties, while agreements may not create any legal obligations.
  • Contracts involve the exchange of something of value between the parties, such as money, goods, services, etc., while agreements may not involve any exchange of value.
  • Agreements can be informal and may be oral or written. In contrast, contracts are generally formal, written documents that spell out the terms and conditions of the agreement.

Conclusion

After summarizing all the above information, we can state that the main difference between agreement and contract is that an agreement is an understanding or meeting of the minds between two or more parties. In contrast, a contract is a legally binding agreement between two or more parties. It is enforceable by law if any party tries to step back from the pre-decided rules or decides to not fulfill their agreed-upon obligations.

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FAQs

Is an agreement legally valid or not?

An agreement is valid and can be presented in the court as evidence. In the absence of its legal validity, the court requires the person presenting the agreement to pay the penalty for the stamp fee for stamp and registration.

How does a contract become valid?

For a contract to be valid, it should have mutual assent, adequate consideration, capacity and legality as well as expression by valid offer.

About the Author
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Anshuman Singh
Senior Executive - Content

Anshuman Singh is an accomplished content writer with over three years of experience specializing in cybersecurity, cloud computing, networking, and software testing. Known for his clear, concise, and informative wr... Read Full Bio